How Payment Bonds Work

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If you are in construction business, you must have heard of payment bonds. Most public construction projects in the state of Florida typically will require contractors, sub-contractors, or builders to have a Florida payment bond.

What is a payment bond?

A payment bond is required in construction projects along with a performance bond. The bond ensures that the principal will pay the suppliers, vendors, sub-contractors and laborers working on the project on time. It is a type of surety bond and like all such bonds, it’s a three-way contract between the obligee, the principal and the surety.

The principal is the party buying the bond, usually a contractor or builder. The obligee is the project owner and the surety is the bonding agency that is licensed to offer Florida payment bonds.

How does it work?

The payment bond is usually demanded at the beginning of the project along with the performance bond. When a contractor wins the bid for a project, he/she must submit these bonds. If the contractor subsequently fails to make the required payments, a complaint can be raised against the bond. If the claim is valid, the surety will pay the amount.

Why do we need the payment bond?

The payment bond is very common in public construction projects and there are good reasons for it:

– It makes sure that all parties in the project are paid on time. This also ensures that there are minimal disruptions, so that the project can be completed smoothly.

– Payment bonds enforce ethical practices, a vital requirement in a public-funded project.
– Without the Florida payment bonds in place, the obligee could be held responsible as the project owner. With the bond in place, the liability of payments is clear, and the funds are in place.